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Gold Miners Are Burning Cash at Current Levels

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At the end of September, Citigroup put out a research report for the gold and silver mining sector, and if you're an investor in the space it does not make for good reading. The report concentrates on the rising costs but falling revenues of the mining industry and sets out how this is going to/has already affected many gold miners. We all have our own opinions, that's what makes us Foolish; nonetheless it is helpful to know what the big players in the industry think about certain matters, and information within this report could be helpful.

The report uses a current spot gold price of $1,320/oz throughout, so that is the figure I'm referring to when I use the term "at current prices."

The most shocking and surprising element of the report states that at current spot prices ($1,320/oz) up to 98% of gold companies are cash-flow negative, a staggering percentage of the industry. What's more, while the price of gold has fallen around 20% during the period June 2012 to June 2013, the average cash cost per ounce of gold production around the world has risen 11.8%, from $675/oz to $754/oz. 

Spiraling out of control
Unfortunately, cash cost per ounce growth of 11.8% is only an average, and the vast majority of companies studied in the report saw their costs increase significantly more. Yamana Gold (NYSE: AUY  ) , for example, saw its year-on-year cash costs rise around 100% through June; the price of gold declined 20% during the same period.

Goldcorp (NYSE: GG  ) also saw its cash cost per ounce of gold produce rocket by approximately 80%. Barrick Gold Corporation (NYSE: ABX  ) , on the other hand, did manage to cut costs, 10% this year through June.

Notional cash expenditure
Additionally, Citi's report comments on notional cash expenditure per ounce, or NCE. NCE includes operating costs plus capital expenditures, excluding minority interest in projects, divided by gold produced -- much like the all in sustaining cash cost per ounce.

Actually, while Goldcorp and Yamana Gold have seen their cash costs per ounce spiral out of control during the past year, their NCE per ounce figures have only expanded around 10% and 30% year on year. Barrick's NCE costs have also fallen by around 10% once again.

On the other hand, Randgold Resources (NASDAQ: GOLD  ) , usually considered one of the more efficient gold miners, has actually seen its NCE costs rise the most out of the group reviewed; NCE costs rose on average 60% year on year for the company. 

Gold is getting harder to find
According to a speech made back in 2012 by Jamie Sokalsky, CEO of Barrick Gold Corp, gold is getting harder to find (obviously, it was never that easy).

According to Jamie only three large mines were discovered during 2012, as opposed to 11 during 1991. Indeed, despite a 1,000% rise in mining capital spending among the world's top ten gold miners during the last decade, gold production has actually fallen 5% over the same period.

This would be fine if the price of gold had risen to offset declining production and rising capex. However, over the same period, the price of gold has only expanded 350%. Specifically, during 2011 when the price of gold reached its high of $1,900/oz and capex among the world's top ten miners hit a 10-year high of $24 billion production, this did not lead to higher levels of production.  

So all in all, gold miners have been spending more and more money to find less gold.

So where to invest?
According to the figures supplied in Citi's report, the miners that are in the best position to ride out the languishing gold prices are Barrick, Yamana, and Goldcorp, despite the fact the Yamana and Goldcorp have noted explosive year-on-year production costs.

However, Yamana's and Goldcorp's cash costs per ounce of gold produced are still below that of Barrick at $500/oz and $700/oz respectively. The miners that are in the worst position are based in South Africa, specifically Harmony, where cash costs per ounce are rising toward $1,200, excluding capex spending and other company admin costs.

Foolish summary
Overall, the gold mining industry is in dire straits. Gold miners are spending more and more cash but are finding less gold. In addition, miners are also receiving a lower price for gold sold, despite rising costs. 

The outlook for the industry is uncertain, but if costs keep rising and the price of gold keeps falling miners will be in real trouble.

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Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 23, 2013, at 2:50 PM, techy46 wrote:

    Citi loves to create FUD while they're buying and the change their recommendation to buy while they're selling.

  • Report this Comment On October 24, 2013, at 2:37 PM, EllenBrandtPhD wrote:

    Rupert, everything now depends on the Yen Short of the Ages cooling down considerably.

    Let the Yen stay historically weak - fine - but now it is TOO weak, to the extent that it is destroying most of the world, including the worldwide Gold mining industry.

    Some of us believe a Grand Bargain has already been made.

    The Yen will be "permitted" to strengtehn to the 95-90 range, from the 105-100 range it has been in the past eleven months.

    That implies:

    *** The NOK strengthening back to under 5.60, where it was the past decade or so.

    *** The AUD and CAD strengthening to a bit above, not under, Parity, where they were most of the past 10-12 years.

    *** And Gold initially strengthening to the 1450-1600 range, where good miners can actually be decently profitable.

    We believe the Grand Bargain has already been reached. But it takes time to turn a battleship around - especially one that's been in the hands of Rogues and Pirates, as well as so-called Professionals.

  • Report this Comment On October 25, 2013, at 8:27 AM, digitalroom wrote:

    Gold is going to be the best investments when the stuff finally hits the fan. Right now the prices of gold is way too low. Should be over $2k/oz. Just wait and see the meltdown happens!

  • Report this Comment On October 25, 2013, at 6:40 PM, EllenBrandtPhD wrote:

    The best-laid plans of DOGs, CATs, and Cronies!

    Major earthquake off Japan's East-Central coast within the past hour - i.e. the BAD place for it to happen.

    No word of aftershocks or tsunami warnings yet. But we are by now experienced in how these events start.

    Currency-wise, we know what this could mean: Zoom upwards in Yen, followed by zoom upwards in Brent, followed by zoom upwards in AUD, followed by zoom upwards in CAD.

    One almost thinks the Cronies, Bay Street Edition, knew this was about to happen, which is why they ranted and raved so hard re the Loonie this week as a pre-emptive, pre-positioning move. Perhaps they have uncanny sensory powers to predict earthquake activity, like some lower animal species are said to have.

    Wouldn't surprise me.

  • Report this Comment On October 25, 2013, at 6:44 PM, EllenBrandtPhD wrote:

    By the way, since I see this story is posted on AUY:

    Quarter-million share stealth after-hours covering in AUY a few minutes after the close.

    Note that this is now Goldman's pet Long among the miners. Some Shorts probably have noted that and decided to go elsewhere.

    Some are expecting - at long last - a liftoff in copper, which specifically benefits AUY, SA, and a coupla others.

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